NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations
Community West Bancshares (“CWBC”), incorporated under the laws of the state of California, is a bank holding company providing full service banking through its wholly-owned subsidiary Community West
Bank, N.A. (“CWB” or the “Bank”). Unless indicated otherwise or unless the context suggests otherwise, these entities are referred to herein collectively and on a consolidated basis as the “Company.”
Basis of Presentation
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the financial
services industry. The accounts of the Company and its consolidated subsidiary are included in these Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly
susceptible to significant changes in the near term relate to the determination of the allowance for loan losses and the fair value of securities available for sale. Although Management believes these estimates to be reasonably accurate, actual
amounts may differ. In the opinion of Management, all necessary adjustments have been reflected in the financial statements during their preparation.
Interim Financial Information
The accompanying unaudited consolidated financial statements as of March 31, 2020 and 2019, and for the three months, have been prepared in a condensed format, and therefore do not include all of the
information and footnotes required by GAAP for complete financial statements. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied to our audited consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2019.
The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period
presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim
financial information should be read in conjunction with the Company’s audited consolidated financial statements.
Reclassifications
Certain amounts in the consolidated financial statements as of December 31, 2019 and for the three months ended March 31, 2019 have been reclassified to conform to the current presentation. The
reclassifications have no effect on net income, comprehensive income or stockholders’ equity as previously reported.
Loans Held For Sale
Loans which are originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value determined on an aggregate basis. Valuation adjustments, if any, are
recognized through a valuation allowance by charges to lower of cost or fair value provision. Loans held for sale are mostly comprised of commercial agriculture and Small Business Association (“SBA”). The Company did not incur any lower of cost
or fair value provision in the three months ended March 31, 2020 and 2019.
Loans Held for Investment and Interest and Fees from Loans
Loans are recognized at the principal amount outstanding, net of unearned income, loan participations and amounts charged off. Unearned income includes deferred loan origination fees reduced by loan
origination costs. Unearned income on loans is amortized to interest income over the life of the related loan using the level yield method.
Interest income on loans is accrued daily using the effective interest method and recognized over the terms of the loans. Loan fees collected for the origination of loans less direct loan origination
costs (net deferred loan fees) are amortized over the contractual life of the loan through interest income. If the loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the
contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the loan commitment. Commitment
fees based on a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period.
When loans are repaid, any remaining unamortized balances of unearned fees, deferred fees and costs and premiums and discounts paid on purchased loans are accounted for through interest income.
Nonaccrual loans: For all loan types, when a borrower discontinues making payments as contractually required by the note, the Company must determine whether
it is appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual status and ceases recognizing interest income when the loan has become delinquent by more than 90 days or when Management determines that the
full repayment of principal and collection of interest is unlikely. The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent if they are well secured by collateral and in the process of collection. Other
personal loans are typically charged off no later than 120 days delinquent.
For all loan types, when a loan is placed on nonaccrual status, all interest accrued but uncollected is reversed against interest income in the period in which the status is changed. Subsequent
payments received from the customer are applied to principal and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as
contractually required. The Company occasionally recognizes income on a cash basis for non-accrual loans in which the collection of the remaining principal balance is not in doubt.
Impaired loans: A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled
payments of principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal
and/or interest payments. Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays or payment shortfalls on a case-by-case basis.
When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment. The collateral-dependent loans that recognize impairment are charged down to the
fair value less costs to sell. All other loans are measured for impairment either based on the present value of future cash flows or the loan’s observable market price.
Troubled debt restructured loan (“TDR”): A TDR is a loan on which the Company, for reasons related to the borrower’s financial difficulties, grants a
concession to the borrower that the Company would not otherwise consider. These concessions include but are not limited to term extensions, rate reductions and principal reductions. Forgiveness of principal is rarely granted and modifications for
all classes of loans are predominately term extensions. A TDR loan is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a troubled debt restructuring in years
subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.
Guidance on Non-TDR Loan Modifications due to COVID-19
On March 22, 2020, a statement was issued by banking regulators and titled “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”
that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic
Security Act (Cares Act) that passed on March 27, 2020 further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31,
2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we
are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extension of
repayment terms, or other delays in payment that are insignificant. The modifications completed in the three months ended March 31, 2020 were immaterial.
Allowance for Loan Losses and Provision for Loan Losses
The Company maintains a detailed, systematic analysis and procedural discipline to determine the amount of the allowance for loan losses (“ALL”). The ALL is based on estimates and is intended to be
appropriate to provide for probable losses inherent in the loan portfolio. This process involves deriving probable loss estimates that are based on migration analysis and historical loss rates, in addition to qualitative factors that are based on
management’s judgment. The migration analysis and historical loss rate calculations are based on the annualized loss rates and the Company extended its time horizon for the ALL methodology in 2019. Migration analysis is utilized for the Commercial
Real Estate (“CRE”), Commercial, Commercial Agriculture, Small Business Administration (“SBA”), Home Equity Line of Credit (“HELOC”), Single Family Residential, and Consumer portfolios. The historical loss rate method is utilized primarily for the
Manufactured Housing portfolio. The migration analysis takes into account the risk rating of loans that are charged off in each loan category. Loans that are considered Doubtful are typically charged off. The following is a description of the
characteristics of loan ratings. Loan ratings are reviewed as part of our normal loan monitoring process, but, at a minimum, updated on an annual basis.
Substantially Risk Free – These borrowers have virtually no probability of default or
loss given default and present no identifiable or potential adverse risk to the Company. Documented repayment is either backed by the full faith and credit of the United States Government, or secured by cash collateral of the principal
borrowed. The collateral must be in the possession of the Company and free from potential claim. In addition, these credits will conform in all aspects to established loan policies and procedures, laws, rules, and regulations.
Nominal Risk – This rating is for the highest quality borrowers with nominal probability of default or loss given default from the transaction. Typically this
is a borrower with a well-established record of financial performance, a strong equity position, abundant liquidity and excellent debt service ability. The Borrower’s financial outlook is stable due to a broad range of operations or products and
is able to weather an economic downturn without significant impact to liquidity or net worth. Typically, this borrower will be publicly owned or have access to public debt or equity, all investment grade. In addition, these credits will conform
in all aspects to established loan policies and procedures, laws, rules, and regulations. Transaction can include marketable securities as collateral, properly margined.
Pass/Management Attention Risk – The loans in the four remaining pass categories range from minimal risk to moderate risk to acceptable risk to management attention risk. Loans
rated in the first three categories are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in the minimal and moderate risk categories are loans to quality borrowers with financial statements
presenting a good primary source as well as an adequate secondary source of repayment. In the case of individuals, borrowers with this rating are quality borrowers demonstrating a reasonable level of secure income, a net worth adequate to support
the loan and presenting a good primary source as well as an adequate secondary source of repayment. Loans rated management attention risk indicate that although the borrower meets the criteria for a rating of acceptable risk or better, the credit
possesses an identified and elevated risk level that should be resolved in a short period of time. Technical risks include, but are not limited to, inadequate or improperly executed documentation, which may be material, serious delays in the
submission of financial reporting or covenant violations that are not indicative of a protracted trend.
Special Mention - A Special Mention loan has potential weaknesses that require management’s close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant
adverse classification.
Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if
any. These loans have a well-defined weakness or weaknesses that jeopardize full collection of amounts due. They are characterized by the distinct possibility that the Company will sustain some loss if the borrower’s deficiencies are not
corrected.
Doubtful - A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending
factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation
procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable loans is not warranted. This
classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. Losses are taken in the
period in which they are considered uncollectible.
The Company’s ALL is maintained at a level believed appropriate by management to absorb known and inherent probable losses on existing loans. The allowance is charged for losses when management
believes that full recovery on the loan is unlikely. The following is the Company’s policy regarding charging off loans.
Commercial, CRE and SBA Loans
Charge-offs on these loan categories are taken as soon as all or a portion of any loan balance is deemed to be uncollectible. A loan is considered impaired when, based on current information, it is
probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and/or interest payments. Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Generally, loan balances are
charged-down to the fair value of the collateral, if, based on a current assessment of the value, an apparent deficiency exists. In the event there is no perceived equity, the loan is charged-off in full. Unsecured loans which are delinquent over
90 days are, without clear support, also charged-off in full.
Single Family Real Estate, HELOC’s and Manufactured Housing Loans
Consumer loans and residential mortgages secured by one-to-four family residential properties, HELOC and manufactured housing loans in which principal or interest is due and unpaid for 90 days, are
evaluated for impairment. Loan balances are charged-off to the fair value of the property, less estimated selling costs, if, based on a current appraisal, an apparent deficiency exists. In the event there is no perceived equity, the loan is
generally fully charged-off.
Consumer Loans
All consumer loans (excluding real estate mortgages, HELOCs and cash secured loans) are charged-off or charged-down to net recoverable value before becoming 120 days or five payments delinquent.
The ALL calculation for the different loan portfolios is as follows:
The Company evaluates and individually assesses for impairment loans classified as substandard or doubtful in addition to loans either on nonaccrual, considered a TDR or when other conditions exist
which lead management to review for possible impairment. Measurement of impairment on impaired loans is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans. The amount of impairment is determined by
comparing the recorded investment in each loan with its value measured by one of three methods:
Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract and the borrower
provides financial information to support maintaining the loan on accrual.
The Company determines the appropriate ALL on a monthly basis. Any differences between estimated and actual observed losses from the prior month are reflected in the current period in determining the
appropriate ALL determination and adjusted as deemed necessary. The review of the appropriateness of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size and composition of the loan
portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees and economic and environmental conditions that may affect the borrowers’ ability to pay and/or the value of the underlying collateral.
Additional factors considered include: geographic location of borrowers, changes in the Company’s product-specific credit policy and lending staff experience. These estimates depend on the outcome of future events and, therefore, contain inherent
uncertainties.
Another component of the ALL considers qualitative factors related to non-impaired loans. The qualitative portion of the allowance on each of the loan pools is based on changes in any of the following
factors:
Off Balance Sheet and Credit Exposure
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the consolidated financial statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets. Losses would be experienced when
the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment
of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
As with outstanding loans, the Company applies qualitative factors to its off-balance sheet obligations in determining an estimate of losses inherent in these contractual obligations. The estimate
for loan losses on off-balance sheet instruments is included within other liabilities and the charge to income that establishes this liability is included in non-interest expense.
Foreclosed Real Estate and Repossessed Assets
Foreclosed real estate and other repossessed assets are recorded at fair value at the time of foreclosure less estimated costs to sell. Any excess of loan balance over the fair value less estimated
costs to sell of the other assets is charged-off against the allowance for loan losses. Any excess of the fair value less estimated costs to sell over the loan balance is recorded as a loan loss recovery to the extent of the loan loss previously
charged-off against the allowance for loan losses; and, if greater, recorded as a gain on foreclosed assets. Subsequent to the legal ownership date, the Company periodically performs a new valuation and the asset is carried at the lower of
carrying amount or fair value less estimated costs to sell. Operating expenses or income, and gains or losses on disposition of such properties, are recorded in current operations.
Income Taxes
The Company uses the asset and liability method, which recognizes an asset or liability representing the tax effects of future deductible or taxable amounts that have been recognized in the
consolidated financial statements. Due to tax regulations, certain items of income and expense are recognized in different periods for tax return purposes than for financial statement reporting. These items represent “temporary differences.”
Deferred income taxes are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the
deferred tax assets may not be realized. Any interest or penalties assessed by the taxing authorities is classified in the financial statements as income tax expense. Deferred tax assets are included in other assets on the consolidated balance
sheets.
Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s
historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time
the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
The Company is subject to the provisions of ASC 740, Income Taxes (“ASC 740”). ASC 740 prescribes a more likely than not threshold for the financial
statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. On a quarterly basis, the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period divided into the net income. Diluted earnings per share include the effect of
all dilutive potential common shares for the period. Potentially dilutive common shares include stock options.
Recent Accounting Pronouncements
Effective January 1, 2019, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). This update amends the accounting requirements for leases by requiring
recognition of lease liabilities and related right-of-use assets on the balance sheet. Lessees are required to recognize a lease liability measured on a discounted basis, which is the lessee’s right to use, or control the use of, a specified asset
for the lease term. We adopted Topic 842 using the modified retrospective approach. We have recorded the cumulative effects on our balance sheet as of the effective date. As a result of the adoption, there was no impact on net income. We
recorded operating lease right-of-use assets of $8.4 million and lease liabilities of $8.4 million upon adoption. As of March 31, 2020, the operating lease right-of-use assets was $6.1 million and lease liabilities of $6.1 million. As part of the
adoption, we elected the package of practical expedients permitted under the transition guidance within Topic 842, which among other things, allowed us to carry forward the historical lease classifications. Leases with a term of 12 months or less
are not recorded on the balance sheet. See Note 11, Leases for further information.
In June of 2016, the FASB issued updated guidance codified within ASU-2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which amends
the guidance for recognizing credit losses from an “incurred loss” methodology that delays recognition of credit losses until it is probable a loss has been incurred to an expected credit loss methodology. The guidance requires the use of the
modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The standard is effective for the Company as of January 1, 2023. The Company is
currently evaluating the impact of the amended guidance and has not yet determined the effect of the standard on its ongoing financial reporting.
In March 2017, the FASB issued updated guidance codified within ASU-2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20),” which is intended to enhance the accounting for the
amortization of premiums for purchased callable debt securities. The Company adopted this guidance as of January 1, 2019, which did not have a material impact on the Company’s Consolidated Financial Statements.
In March 2020, the FASB issued updated guidance codified within ASU-2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting,” which provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In response to the risk of cessation of the
London Interbank Offered Rate (“LIBOR”), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less
susceptible to manipulation. The Company is currently evaluating the impact of the amended guidance and has not yet determined the effect of the standard on its ongoing financial reporting.
The amortized cost and estimated fair value of investment securities are as follows:
At March 31, 2020 and December 31, 2019, $23.8 million and $25.6 million of securities at carrying value, respectively, were pledged to the Federal Home Loan Bank (“FHLB”), as collateral for current
and future advances.
The maturity periods and weighted average yields of investment securities at the period ends indicated were as follows:
The amortized cost and fair value of investment securities by contractual maturities as of the periods presented were as shown below:
Actual maturities may differ from contractual maturities as borrowers or issuers have the right to prepay or call the investment securities. Changes in interest rates may also impact prepayments.
The following tables show all securities that are in an unrealized loss position:
As of March 31, 2020 and December 31, 2019, there were 21 and 20 securities, respectively, in an unrealized loss position. Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things: (i) the length of time and the
extent to which the fair value has been less than cost; (ii) the financial condition and near-term prospects of the issuer; and (iii) the Company’s intent to sell an impaired security and if it is not more likely than not it will be required to
sell the security before the recovery of its amortized basis.
The unrealized losses are primarily due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as
the bonds approach their maturity date, repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2020 and
December 31, 2019, management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment loss has been realized in the Company’s consolidated income statements.
SBA and Agriculture Loans
As of March 31, 2020 and December 31, 2019, the Company had approximately $9.4 million and $10.4 million, respectively, of SBA loans included in loans held for sale. As of March 31, 2020 and December
31, 2019, the principal balance of SBA loans serviced for others was $4.6 million and $5.2 million, respectively.
The Company’s agricultural lending program includes loans for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock. The primary products
are supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program.
As of March 31, 2020 and December 31, 2019, the Company had $30.1 million and $31.6 million of USDA loans included in loans held for sale, respectively. As of March 31, 2020 and December 31, 2019, the
principal balance of USDA loans serviced for others was $1.9 million.
The composition of the Company’s loans held for investment loan portfolio follows:
The following table presents the contractual aging of the recorded investment in past due held for investment loans by class of loans:
Allowance for Loan Losses
While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained stable at March 31, 2020. However, the COVID-19 pandemic has led to the temporary closure of business
throughout the communities in which we serve, which has led to increased unemployment. Therefore, we increased the economic factor in our ALL calculation during the quarter to account for inherent risk within the loan portfolio as of March 31,
2020. We continue to monitor the economic impact from COVID-19 as it relates to credit risk to ensure the ALL is appropriate.
The following table summarizes the changes in the allowance for loan losses:
As of March 31, 2020 and December 31, 2019, the Company had reserves for credit losses on undisbursed loans of $76,000 and $85,000, respectively, which were included in other liabilities.
The following tables summarize the changes in the allowance for loan losses by portfolio type:
The following tables present impairment method information related to loans and allowance for loan losses by loan portfolio segment:
Included in impaired loans are $0.5 million and $0.6 million of loans guaranteed by government agencies at March 31, 2020 and December 31, 2019, respectively. A valuation allowance is established for
an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable
in the table below as “Impaired loans without specific valuation allowance under ASC 310.” The valuation allowance disclosed above is included in the allowance for loan losses reported in the consolidated balance sheets as of March 31, 2020 and
December 31, 2019.
The table below reflects recorded investment in loans classified as impaired:
The following table summarizes impaired loans by class of loans:
The following tables summarize average investment in impaired loans by class of loans and the related interest income recognized:
The Company is not committed to lend additional funds on these impaired loans.
The following table reflects the recorded investment in certain types of loans at the periods indicated:
The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally at the time the loan is 90 days delinquent. Any unpaid but accrued interest is
reversed at that time. Thereafter, interest income is no longer recognized on the loan. Interest income may be recognized on impaired loans to the extent they are not past due by 90 days. Interest on nonaccrual loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Foregone interest on nonaccrual and TDR loans for the three months ended March 31, 2020 and 2019, was $0.1 million.
The following table presents the composition of nonaccrual loans by class of loans:
Included in nonaccrual loans are $0.3 million of loans guaranteed by government agencies at March 31, 2020 and $0.3 million at December 31, 2019.
The guaranteed portion of each SBA loan is repurchased from investors when those loans become past due 120 days by either CWB or the SBA directly. After the foreclosure and collection process is
complete, the principal balance of loans repurchased by CWB are reimbursed by the SBA. Although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB; therefore a repurchase reserve has
not been established related to these loans.
The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company rates loans with
potential problems as “Special Mention,” “Substandard,” “Doubtful” and “Loss”. For a detailed discussion on these risk classifications see “Note 1 Summary of Significant Accounting Policies - Allowance for Loan Losses and Provision for Loan
Losses”. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do
not expose an institution to sufficient risk to warrant adverse classification. Risk ratings are updated as part of our normal loan monitoring process, at a minimum, annually.
The following tables present gross loans by risk rating:
Troubled Debt Restructured Loan (TDR)
A TDR is a loan on which the bank, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the bank would not otherwise consider. The loan terms that have
been modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a
reduction in the face amount of the debt, a reduction in the accrued interest, extensions, deferrals, renewals and rewrites. The majority of the bank’s modifications are extensions in terms or deferral of payments which result in no lost principal
or interest followed by reductions in interest rates or accrued interest. A TDR is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a troubled debt restructuring in
years subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.
The following tables summarize the financial effects of TDR loans by loan class for the periods presented:
There was one new TDR loan for the three months ended March 31, 2020 and 2019. The rate concession was 100 basis points for the three months ended March 31, 2020 and 200 basis points for the three
months ended March 31, 2019. The term extension in months was 181 for the three months ended March 31, 2020 and the term extension was 47 for the three months ended March 31, 2019.
A TDR loan is deemed to have a payment default when the borrower fails to make two consecutive payments or the collateral is transferred to repossessed assets. The Company had no TDR’s with payment
defaults for the three months ended March 31, 2020 or 2019.
At March 31, 2020 there were no material loan commitments outstanding on TDR loans.
Guidance on Non-TDR Loan Modifications due to COVID-19
On March 22, 2020, a statement was issued by banking regulators and titled “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”
that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic
Security Act (CARES Act) that passed on March 27, 2020 further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31,
2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we
are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extension of
repayment terms, or other delays in payment that are insignificant. The modifications completed in the three months ended March 31, 2020 were immaterial.
The following table summarizes the changes in other assets acquired through foreclosure:
Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets (primarily manufactured housing) are
classified as other real estate owned and other repossessed assets and are reported at fair value at the time of foreclosure less estimated costs to sell. Costs relating to development or improvement of the assets are capitalized and costs related
to holding the assets are charged to expense. The balance is primarily attributable to a single commercial agricultural relationship.
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. FASB ASC 820, Fair Value Measurements and Disclosures
(“ASC 820”) established a framework for measuring fair value using a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset as of the
measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s
assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of
inputs, as follows:
The availability of observable inputs varies based on the nature of the specific financial instrument. To the extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the
inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined
based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. When market assumptions
are available, ASC 820 requires the Company to make assumptions regarding the assumptions that market participants would use to estimate the fair value of the financial instrument at the measurement date.
FASB ASC 825, Financial Instruments (“ASC 825”) requires disclosure of fair value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for
substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at March 31, 2020 and December 31, 2019. The estimated fair
value amounts for March 31, 2020 and December 31, 2019 have been measured as of period-end, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those dates. As such, the estimated fair
values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.
This information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and
liabilities.
Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be
meaningful.
The following tables summarize the fair value of assets measured on a recurring basis:
Market valuations of our investment securities which are classified as Level 2 are provided by an independent third party. The fair values are determined by using several sources for valuing fixed
income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation
sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
On certain SBA loan sales, the Company retained interest only strip assets (“I/O strips”) which represent the present value of excess net cash flows generated by the difference between (a) interest at
the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees. I/O strips are classified as Level 3 in the fair value hierarchy. The fair value is determined on a
quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds. I/O strip valuation adjustments are recorded as additions or offsets to loan servicing income.
The Company had elected to use the amortizing method for the treatment of servicing assets and had measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an
independent third party using industry prepayment speeds. In connection with the sale of certain SBA and USDA loans the Company recorded servicing assets and elected to measure those assets at fair value in accordance with ASC 825-10. Significant
assumptions in the valuation of servicing assets include estimated loan repayment rates, the discount rate, and servicing costs, among others. Servicing assets are classified as Level 3 measurements due to the use of significant unobservable
inputs, as well as significant management judgment and estimation.
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans held for sale, foreclosed real estate and
repossessed assets and certain loans that are considered impaired per generally accepted accounting principles.
The following summarizes the fair value measurements of assets measured on a non-recurring basis:
The Company records certain loans at fair value on a non-recurring basis. When a loan is considered impaired an allowance for a loan loss is established. The fair value measurement and disclosure
requirement applies to loans measured for impairment using the practical expedients method permitted by accounting guidance for impaired loans. Impaired loans are measured at an observable market price, if available or at the fair value of the
loan’s collateral, if the loan is collateral dependent. The fair value of the loan’s collateral is determined by appraisals or independent valuation. When the fair value of the loan’s collateral is based on an observable market price or current
appraised value, given the current real estate markets, the appraisals may contain a wide range of values and accordingly, the Company classifies the fair value of the impaired loans as a non-recurring valuation within Level 2 of the valuation
hierarchy. For loans in which impairment is determined based on the net present value of cash flows, the Company classifies these as a non-recurring valuation within Level 3 of the valuation hierarchy.
Foreclosed real estate and repossessed assets are carried at the lower of book value or fair value less estimated costs to sell. Fair value is based upon independent market prices obtained from
certified appraisers or the current listing price, if lower. When the fair value of the collateral is based on a current appraised value, the Company reports the fair value of the foreclosed collateral as non-recurring Level 2. When a current
appraised value is not available or if management determines the fair value of the collateral is further impaired, the Company reports the foreclosed collateral as non-recurring Level 3.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of the Company’s financial instruments are as follows:
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheets for cash and due from banks approximate their fair value.
Investment securities
The fair value of Farmer Mac class A stock is based on quoted market prices and are categorized as Level 1 of the fair value hierarchy.
The fair value of other investment securities were determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield
curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are generally categorized as Level 2 in the fair value hierarchy.
Federal Reserve Stock and Federal Home Loan Bank Stock
CWB is a member of the FHLB system and maintains an investment in capital stock of the FHLB. CWB also maintains an investment in capital stock of the Federal Reserve Bank (“FRB”). These investments
are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of our FHLB stock to determine if any impairment exists. The fair values have been categorized
as Level 2 in the fair value hierarchy.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar
characteristics or based on the agreed-upon sale price. As such, the Company classifies the fair value of loans held for sale as a non-recurring valuation within Level 2 of the fair value hierarchy. At March 31, 2020 and December 31, 2019, the
Company had loans held for sale with an aggregate carrying value of $39.5 million and $42.0 million respectively.
Loans
Fair value of loans is estimated by calculating loan level fair values for all loans utilizing a discounted cash flow methodology incorporating “exit pricing” analytics in conformance with ASU
2016-01. All active loans were valued in the portfolio as of date of exercise, excluding any loans held for sale, and utilized assumptions such as probability of default, loss given default, recovery delay and prepayment assumptions. Fair value
was calculated in accordance with ASC 820. The fair value for loans is categorized as Level 2 in the fair value hierarchy. Fair values of impaired loans using a discounted cash flow method to measure impairment have been categorized as Level 3.
Deposits
The amount payable at demand at report date is used to estimate the fair value of demand and savings deposits. The estimated fair values of fixed-rate time deposits are determined by discounting the
cash flows of segments of deposits that have similar maturities and rates, utilizing a discount rate that approximates the prevailing rates offered to depositors as of the measurement date. The fair value measurement of deposit liabilities is
categorized as Level 2 in the fair value hierarchy.
Federal Home Loan Bank advances and other borrowings
The fair values of the Company’s borrowings are estimated using discounted cash flow analyses, based on the market rates for similar types of borrowing arrangements. The FHLB advances have been
categorized as Level 2 in the fair value hierarchy.
Off-balance sheet instruments
Fair values for the Company’s off-balance sheet instruments (lending commitments and standby letters of credit) are based on quoted fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties’ credit standing.
There were $0.6 million standby letters of credit outstanding at March 31, 2020 and zero at December 31, 2019. Unfunded loan commitments at March 31, 2020 and December 31, 2019 were $59.8 million and
$57.5 million, respectively.
Federal Home Loan Bank Advances – The Company through the bank has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the
aggregate by CWB’s eligible loans and securities. Total FHLB advances were $105.0 million and $65.0 million at March 31, 2020 and December 31, 2019, respectively, borrowed at fixed rates. The Company also had $89.3 million of letters of credit
with FHLB at March 31, 2020 to secure public funds. At March 31, 2020, CWB had pledged to the FHLB $23.8 million of securities and $329.9 million of loans. At March 31, 2020, CWB had $32.9 million available for additional borrowing. At December
31, 2019, CWB had pledged to the FHLB $25.6 million of securities and $324.2 million of loans. At December 31, 2019, CWB had $60.5 million available for additional borrowing. Total FHLB interest expense for the three months ended March 31, 2020
and March 31, 2019 was $0.4 million and $0.3 million, respectively.
Federal Reserve Bank – The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans for up to 28
days. There were no outstanding FRB advances as of March 31, 2020 and December 31, 2019. Available borrowing capacity was $110.7 million and $108.6 million as of March 31, 2020 and December 31, 2019, respectively.
Federal Funds Purchased Lines – The Company has federal
funds borrowing lines at correspondent banks totaling $20.0 million. There was no amount outstanding as of March 31, 2020 and December 31, 2019.
Line of Credit - In July of 2019, the Company entered into a change of terms on its revolving line of credit agreement for up to $10.0 million. The Company
must maintain a compensating deposit with the lender of 25% of the outstanding principal balance in a non-interest-bearing deposit account, which was $2.5 million at March 31, 2020. In addition, the Company must maintain a minimum debt service
coverage ratio of 1.65, a minimum Tier 1 leverage ratio of 7.0% and a minimum total risked based capital ratio of 10.0%. As of March 31, 2020, the outstanding balance of the revolving line of credit was $10.0 million at a rate of 5.33%.
The following table summarizes the changes in other comprehensive income (loss) by component, net of tax for the period indicated:
Common Stock
On February 28, 2019, the Board of Directors increased the common stock repurchase program to $4.5 million and extended the repurchase program until August 31, 2021. Under this program the Company
has repurchased 350,189 common stock shares for $3.0 million at an average price of $8.71 per share. There were no common stock shares repurchased under this program during the three months ended March 31, 2020.
During the three months ended March 31, 2020 and 2019, the Company paid common stock dividends of $0.5 million.
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. In July 2013, the federal banking agencies approved
the final rules (“Final Rules”) to establish a new comprehensive regulatory capital framework with a phase-in period beginning January 1, 2015 and ending January 1, 2019. The Final Rules implement the third installment of the Basel Accords (“Basel
III”) regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and substantially amend the regulatory risk-based capital rules applicable to the Company. Basel III
redefines the regulatory capital elements and minimum capital ratios, introduces regulatory capital buffers above those minimums, revises rules for calculating risk-weighted assets and adds a new component of Tier 1 capital called Common Equity
Tier 1, which includes common equity and retained earnings and excludes preferred equity.
In November 2019, the federal banking agencies jointly issued a final rule which provides for an additional optional, simplified measure of capital adequacy, the community bank leverage ratio framework. The final
rule was effective January 1, 2020. Under this framework the bank would choose the option of using the community bank leverage ratio (CBLR). In order to qualify, a community banking organization is defined as having less than $10 billion in total
consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. A CBLR bank may opt out of the framework
at any time, without restriction, by reverting to the generally applicable risk-based capital rules. The Company chose the CBLR option for calculation of its capital ratio in the first quarter of 2020.
The following tables illustrates the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of March 31, 2020 and December 31, 2019. The Federal Reserve’s fully phased-in
guidelines applicable in 2019 are also summarized.
There are no conditions or events since March 31, 2020 that management believes have changed the Company’s or the Bank’s risk-based capital category.
The Company adopted ASU No, 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606 on January 1, 2018.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as servicing rights, financial guarantees
and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to non-interest income streams such as deposit related fees, interchange fees and merchant income. However the recognition of these income streams did
not change upon the adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Non-interest revenue streams in-scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of monthly service fees, check orders, account analysis fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees and
account analysis fees is generally satisfied, and the related income recognized, over the period in which the service is provided. Check orders and other deposit related fees are largely transactional based and, therefore, the Company’s performance
obligation is satisfied and related income recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Exchange Fees and Other Service Charges
Exchange fees and other service charges are primarily comprised of debit and credit card income, merchant services income, ATM fees and other service charges. Debit and credit card income is primarily comprised of
interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or MasterCard. Merchant services income is primarily fees charged to merchants to process their debit and credit card
transactions. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Other service charges include fees from processing wire transfers, cashier’s checks and other
services. The Company’s performance obligation for exchange and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the
following month.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for periods indicated.
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A
contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on
transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and income is recognized. The Company does not typically enter into long-term revenue contracts with customers,
and therefore, does not experience significant contract balances. As of March 31, 2020 and December 31, 2019, the Company did not have any signficant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected
to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company utilizes the practical
expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not
capitalize any contract acquisition cost.
As described in Note 1 – Summary of Significant Accounting Policies – Recent Accounting Pronouncements, effective January 1, 2019, we adopted Topic 842. We have operating leases for office space. Our office leases
are typically for terms of between 2 and 10 years. Rents usually increase annually in accordance with defined rent steps or based on current year consumer price index adjustments. When renewal options exist, we generally do not deem them to be
reasonably certain to be exercised, and therefore the amounts are not recognized as part of our lease liability nor our right-of-use asset. As part of the adoption, we elected the package of practical expedients permitted under the transition
guidance, but not the hindsight practical expedient. As of March 31, 2020, the balance of the right-of-use assets was $6.1 million and the lease liabilities were $6.1 million. The right-of-use assets are included in other assets and the lease
liabilities are included in other liabilities in the accompanying Consolidated Balance Sheets.
Future minimum operating lease payments:
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 pandemic has
adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and
forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries,
including the geographical area in which the Company operates. Due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00 percent on March 3, 2020 for the first time. Such
events also may adversely affect business and consumer confidence, generally, and the Company and its customers, and their respective suppliers, vendors and processors, may be adversely affected. On March 3, 2020, the Federal Open Market Committee
reduced the targeted federal funds interest rate range by 50 basis points to 1.00 percent to 1.25 percent. This range was further reduced to 0 percent to 0.25 percent on March 16, 2020. On March 27, 2020, the Coronavirus
Aid, Relief, and Economic Security Act (CARES Act) was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. These reductions in interest rates and
other effects of the COVID-19 pandemic may adversely affect the Company’s financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the
complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit
losses on loan receivables.